On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted. Effective January 1, 2018, the legislation significantly changed U.S. tax law by lowering the federal corporate tax rate from 35.0% to 21.0%, modifying the foreign earnings deferral provisions, and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 31, 2017. Effective for 2018 and forward, there are additional changes including changes to refundable AMT credits, bonus depreciation, the deduction for executive compensation and interest expense. As of December 31, 2017, two provisions affecting the financial statements are the refundable AMT credits and the one-time toll charge. The change in tax rate which would affect the value of deferred tax assets in the amount of $1.7 million would be offset by a change in the valuation reserve. Since the toll charge on deemed repatriated earnings of foreign subsidiaries is effective for the tax year ending in 2017, the Company has included a deemed dividend in taxable income of $3.3 million for the tax year ending December 31, 2017. The tax cost has been offset by net operating loss carryforwards. The deferred refundable AMT credits amounting to $777,000, which are now fully refundable, have been included for the tax year ending December 31, 2017.
The SEC issued Staff Accounting Bulletin No. 118, which provides the Company with up to one year to finalize accounting for the impacts of the TCJ Act. When the initial accounting for U.S Tax Reform impacts is incomplete, the Company may include provisional amounts when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. The Company has estimated the provisional tax impacts related to the toll charge and as result, the Company recognized a net tax expense of approximately $712,000 ($513,000 for Federal and $199,000 for State) offset by NOL's. It has also recognized a tax benefit of $777,000 for fully refundable AMT credits. The final impact may differ from this and other provisional amounts due to gathering additional information to more precisely compute the amount of tax, additional regulatory guidance that may be issued, and changes in interpretations and assumptions. The Company expects to finalize accounting for the impacts of the TCJ Act during 2018.
The components of income tax benefit are as follows:
|
In thousands |
2017 |
|
2016 |
||
|
Current: |
|||||
|
Federal |
$ |
(777) |
$ |
(89) |
|
|
State and local |
- |
- |
|||
|
Foreign |
|
26 |
|
|
23 |
|
Income tax (expense) benefit, current |
$ |
(751) |
|
$ |
(66) |
|
Deferred: |
|||||
|
Federal |
$ |
- |
$ |
- |
|
|
State and local |
|
- |
|
|
- |
|
Income tax (expense) benefit, deferred |
|
- |
|
|
- |
|
Income tax benefit |
$ |
(751) |
|
$ |
(66) |
Loss before income taxes from the United States operations was $3.5 million and $0.6 million for the years ended December 31, 2017 and 2016, respectively. (Loss) income before income taxes from Canada was $(0.1) million and $0.1 million for the years ended December 31, 2017 and 2016, respectively.
The effective income tax rate differed from the expected federal statutory income tax benefit rate of 34.0% as follows:
|
2017 |
|
2016 |
|||
|
Statutory federal income tax benefit rate |
34.0 |
% |
34.0 |
% |
|
|
State income taxes, net of federal benefit |
0.1 |
3.1 |
|||
|
Deemed dividend tax of deferred foreign income under the TCJ Act |
(14.3) |
- |
|||
|
AMT credit fully refundable under the TCJ Act |
21.6 |
- |
|||
|
Foreign income taxed at different rates |
(1.9) |
|
|
0.7 |
|
|
Deferred tax asset remeasured under the TCJ Act |
(48.6) |
|
|
- |
|
|
Deferred tax asset valuation allowance |
30.6 |
|
|
(29.4) |
|
|
Other |
(0.6) |
|
|
1.3 |
|
|
Effective income tax benefit rate |
20.9 |
% |
|
9.7 |
% |
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities are as follows:
|
In thousands |
2017 |
|
2016 |
||
|
Deferred income tax asset: |
|||||
|
Tax credit carryforwards |
$ |
30 |
$ |
808 |
|
|
Operating loss carryforwards |
4,663 |
6,533 |
|||
|
Net pension costs |
2,499 |
2,225 |
|||
|
Accruals |
(3) |
240 |
|||
|
Allowance for bad debts |
45 |
(10) |
|||
|
Other |
302 |
438 |
|||
|
Valuation allowance |
|
(6,405) |
|
|
(8,318) |
|
Deferred income tax asset, Total |
|
1,131 |
|
|
1,916 |
|
Deferred income tax liability: |
|||||
|
Depreciation |
559 |
1,071 |
|||
|
Other |
|
572 |
|
|
845 |
|
Deferred income tax liability, Total |
|
1,131 |
|
|
1,916 |
|
Net deferred income taxes |
$ |
- |
|
$ |
- |
Operating tax loss carryforwards primarily relate to U.S. federal net operating loss carryforwards of approximately $16.5 million, which begin to expire in 2019. The operating loss carryforwards have been limited by a change in ownership of the Company in 2012 as defined under Section 382 of the Internal Revenue Code. This change in ownership as of June 26, 2012 had limited our operating loss carryforwards at that point to $295,000 per year aggregating $5.9 million. Losses in subsequent years have increased the operating loss carryforwards.
A valuation allowance has been established for the amount of deferred income tax assets as management has concluded that it is more-likely-than-not that the benefits from such assets will not be realized.
The Company’s determinations regarding uncertain income tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company does not have any material uncertain tax positions in 2017 and 2016.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions and Canadian federal and provincial income tax. Currently, no federal, state or provincial income tax returns are under examination.